In horse world, insurance needs vary

Two weeks ago, many racing fans were surprised to learn that an insurance company had paid a horse owner $2.75 million to settle a mortality claim on a racehorse. The amount of the claim didn't surprise racing fans. Horses are insured for far more than $2.75 million, even in this economy.

What surprised them was that the horse was still alive.

The horse, Thorn Song, a two-time Grade 1 stakes winner owned by Zayat Stables, suffered a tendon injury in the Eddie Read Handicap on July 25, 2009, according to the North American Specialty Insurance Company. While being treated for the injury, which was already life-threatening, the horse suffered severe laminitis, which is often fatal. In October, the insurance company paid Zayat Stables's owner, Ahmed Zayat, on the mortality claim, even though the horse had not died, because "Thorn Song's condition met criteria in the policy that authorized NAS to make a claim payment," the company said. After making the payment, the company took possession of the horse.

Although racing fans may have been puzzled by the situation, racehorse owners and breeders run up against similar situations more often than they would prefer. It may sound morbid, especially to those racing fans who prefer to think of horses as athletes, but horses are also assets, they are insured that way, and claims are often settled as if the horse itself is little more than a number on a spreadsheet.

"It's unfortunate to say it like this, but it's like a car getting totaled," said Tom Ludt, the co-owner of Vinery, the breeding farm that also owns a high-performing string of horses. "The insurance company issues you a check, and then they take possession of the asset. Then they can do what they want with it."

Owners of racehorses and breeding stock take advantage of a wide array of insurance products to hedge against risk. For racehorses, the most common policies protect against death. Breeding policies can protect against infertility in first-year stallions, or death or loss of use for mature stallions. Mares can be insured so that breeders are protected if the mare does not get in foal. In utero foals can be protected against loss until they stand and nurse. Owners can also buy health insurance for their horses.

According to breeders and owners, insurance policies are helpful tools in just about any operation, and especially so if the operation includes high-value horses such as stallions. That does not mean, however, that breeders and owners cover every horse in the barn. Instead, most pick and choose where to accept risk and where to hedge against it. And some owners, including the late W.T. Young of Overbrook Farm, accept all of it, forgoing insurance in every instance, even for stallions.

"You have to consider it carefully, because, remember, insurance is an expense that reduces your profit margins," said Michael Hernon, the director of sales at Gainesway Farm in Kentucky. "Each horse, each owner is an individual case, and people adjust their coverage levels by their appetite for risk compared to their financial standing."

In some cases, owners and breeders have no choice. Typically, if an owner is using borrowed money to buy horses - as Zayat did - the lending bank will require the owner to insure the purchases, much as banks require almost all homeowners to purchase home insurance.

Insurance agents stress that individual policies and practices of underwriters vary substantially from company to company, making it hard to provide a precise picture of the market.

"Every policy is different, and every underwriting operation is different," said one agent of a major Kentucky insurance agency.

Although the vast majority of racehorses are not covered by insurance, many stallions are because of the sometimes lucrative streams of revenue studs can generate. Typically, most owners will purchase a first-year fertility policy for a valuable horse just before the horse's retirement in order to protect against infertility. Under those policies, stallions who are not able to get a minimum percentage of mares in foal, generally from 55 percent to 65 percent of the mares covered, will qualify for a payout.

In the last 20 years, two-time Horse of the Year Cigar and two-time Breeders' Cup Mile winner Lure were subject to payouts when the horses proved to be infertile in their first years. In both cases, the insurance company tried a variety of treatments to improve the stallions' fertility rates after taking possession of the horses. In Cigar's case, he was ultimately loaned to the Kentucky Horse Park by the Italian insurance company that took possession from owner Allen Paulson after treatments failed to improve his fertility. Lure was sold to Coolmore Stud by Lloyd's of London shortly after the insurance company took possession, but he was pensioned at 14 and given back to his initial owner, Claiborne Farm.

If a stallion's fertility is established, stallion owners will typically insure the horse for mortality and other ailments that could end their careers. According to agents, who did not want to be named discussing rates because the rates can fluctuate widely among companies, insurance to cover stallions usually runs from 3 to 4 percent of the horse's appraised value.

On the racing side, racehorse owners will pay approximately 4 percent to 6 percent of a horse's value annually to insure the horse against death, though those rates can also fluctuate substantially, agents said. A horse who is appraised at a lower value will generally require a higher rate than a horse of greater value - though not necessarily a higher total premium. Actuarial tables used by insurance companies to predict catastrophic injuries demonstrate that cheaper horses are more likely to die of racing injuries than more expensive horses, according to agents.

In order to arrive at a value for the horse, representatives of insurance companies conduct appraisals that take into account a horse's potential earnings on the racetrack and its residual value in the breeding shed. The appraisals are often updated at least once a year, and always at the annual renewal of the contract, to reflect any changes in the horse's potential.

At Vinery, Ludt and his team review the horses in their operation early in their 2-year-old years as part of their evaluation to determine whether to purchase insurance on a racehorse, though it's not uncommon for Vinery and other owners to insure an expensive horse as a yearling or to decide to insure a horse after it has shown potential on the racetrack. Vinery typically does not insure any horse it does not believe is worth $100,000, Ludt said.

Although show horses and other sport horses can usually be insured against loss of use - in other words, non-catastrophic injuries - insurance companies rarely, if ever, insure racehorses for career-ending injuries. According to agents, that's because loss of use is far too common among racehorses.

In Thorn Song's case, the insurance company paid out on the mortality claim because veterinarians had determined the horse's injuries would almost certainly result in a diagnosis that the horse should be euthanized. Following the injury and payment of the claim, however, the insurance company sent Thorn Song to Dr. Doug Herthel at the Alamo Pintado Equine Medical Center, because the doctor wanted to try a novel stem-cell therapy on the horse to see if his injuries could be treated.

According to reports, Thorn Song, a 7-year-old horse, responded well to the treatments, and the insurance company is weighing whether he may have a stallion career ahead of him. Not a bad ending for a dead horse.